Lion Q3 Trading Update

30 October 2013: Lion today announced its trading update for the nine months to 30 June 2013 (YTD) in conjunction with Kirin Holdings’ third quarter results.

30 October 2013

Lion today announced its trading update for the nine months to 30 June 2013 (YTD) in conjunction with Kirin Holdings’ third quarter results.

Lion continues to pursue its strategy of investing in its people, brands and production assets to drive sustainable results over the long term.

Lion CEO Stuart Irvine said: “Consumer confidence and discretionary spending remained subdued during our third quarter across our key geographies. Like all businesses in retail and consumer goods we are hopeful that the election resolution in Australia will support an improvement in consumer sentiment going forward.

“The beer market decline in Australia and New Zealand continues to slow and we will soon enter our key sales period over summer. We are innovating in growth segments of the market, including craft and cider, and our newly launched category innovation, Tap King, is exceeding expectations.

“In our Dairy & Drinks business we are focused on transformational change in an increasingly competitive and fast-changing environment. Margin pressure persists in price-driven categories such as juice, white milk and everyday cheese and has greatly intensified as the rising global milk price has increased farm-gate milk costs significantly.

“We have undertaken significant efficiency programs right across our operations to deliver a more competitive cost base. Rationalisation within our manufacturing footprint has progressed to plan, allowing us to consolidate volume and invest to improve efficiency. We are aligning our people and resources behind our priority product categories and channel strategies, to further improve business efficiency and customer engagement.

“We recognise we cannot achieve sustainable growth with a focus on costs alone. We will continue to invest in growing our brands, innovating to give consumers more reasons to choose from our portfolio and exploring opportunities for our brands in international markets.”

Since the conclusion of the quarter Lion moved to acquire a shareholding of 9.99% in Warrnambool Cheese & Butter (WCB). Lion has enjoyed a close relationship with WCB over many years and WCB plays an important role in Lion’s everyday cheese business.

Beer, Spirits & Wine

Australia

During the quarter the beer market decline slowed, and within this environment Lion increased its volumes 9.7 percent. Since the conclusion of the quarter market volumes have stabilised and are broadly flat.[1]

Owing to the addition of Little World Beverages and international premium brands, such as Corona Extra, Stella Artois, Guinness and Kilkenny, revenue increased 19.2 percent to $1,595 million.

Craft continued to be a standout, with category growth over 22% and James Squire outperforming the category at 27%.[2] Little Creatures also grew volumes, and will soon benefit from improved distribution, with brewing at the newly constructed Geelong brewery underway and the site expected to be fully operational by December.

In wine, St Hallett saw double-digit volume growth through a mix of export and local grocery growth and Knappstein and Stonier also performed well.

New Zealand

The total beer market contracted during the quarter, while wine volumes were impacted by aggressive competitor activity in grocery. This contributed to a total volume decline of 4.3 percent across Lion’s portfolio.

Within this challenging environment Lion was able to offset the impact of volume declines through a sustainable balance of volume, diversification of revenue, pricing and mix, growing revenues 3.1 percent to $NZ 517 million.

In beer Lion saw standout performances from Corona Extra, Beck’s and Budweiser, all benefiting from effective marketing campaigns and posting double-digit volume growth[3]. Capitalising on the Masterchef phenomenon and a strong above-the-line campaign, the award winning Wither Hills achieved strong volume growth, while the tequila and bourbon categories also thrived4 as Lion commenced the distribution of Wild Turkey in New Zealand.

Dairy & Drinks

Lion continued to experience volume declines in price driven categories such as juice and everyday cheese, as product rationalisation and heavy discounting continued, leading to a revenue decline of 4.4 percent to $1,834 million.

Since the conclusion of the third quarter Lion has seen a significant increase in the cost of milk at farm-gate, as the global price for milk has increased off the back of high demand. The 2013/14 milk price, set in July each year, is up to 27 percent higher on last year’s average price in some states and in the context of a highly competitive and deflationary retail environment, will place significant pressure on profitability.

Higher-value categories continued to perform well during the quarter. Flavoured milk grew its share of non-alcohol beverages, with all Lion brands – Dare, Big M, Divine Classic, Farmers Union, Masters and Moove – in growth in grocery[4]. Dare is now the clear number one iced coffee and the number four non-alcoholic beverage behind Coke, Red Bull and V.

Yoplait and speciality cheese brands South Cape, Tasmanian Heritage and Mersey Valley all grew volume and value5. Lion’s investment into a state-of-the-art speciality cheese facility, The Heritage, in Burnie Tasmania is now complete and will support future category growth.

[1] Aztec: beer market volume decline at 1.4 percent MAT to August 2013 and flat MQT to August 2013